Before the announcement of the interest rate meeting in January, investors had certain expectations for the Federal Reserve to appease the recent market fluctuations. However, Powell's hawkish attitude at the press conference shook the market again. The 10-year US bond interest rate rose 9bps to 1.87%, the US dollar index closed up 0.5%, and the three major US stock indexes fell sharply.
The statement of the meeting indicated that the interest rate would be increased in March and the reduction rate would probably start in the third quarter.
The Fed's meeting statement basically made clear the signal of raising interest rates in March.
The statement of the meeting deleted "the commitment to use a full set of tools to support the U.S. economy in difficult times in order to achieve the goals of full employment and price stability". "It is appropriate to raise the target range of the federal funds rate in the near future," he said. In past statements, "soon" often meant the next meeting, so the Fed has a high probability of raising interest rates in March. The information on the reduction of the table was not disclosed much, and the approximate rate was reduced in the third quarter.
Although the Federal Reserve released the "table reduction guidelines", the guidelines did not explicitly disclose or imply the time of table reduction. We believe that the purpose of the Fed's table contraction is to match the rhythm of interest rate hike in order to maintain a healthy term interest rate spread. As of January 24, the term spread of us 10-2-year US bond interest rate was 76bps. In order to prevent the upside down of the yield curve, we think it is more appropriate for the Federal Reserve to shrink its table between the second and third interest rate hikes, probably in the third quarter.
In order to ensure stable inflation, the Federal Reserve has a high probability of raising interest rates four times a year.
At the press conference after the meeting, Powell said that in order to achieve the goal of full employment, price stability is very important. The implication is that the current excessively high inflation rate has suppressed the recovery of employment. The Fed began to focus on the negative feedback of inflation on employment. This in fact released a very hawkish interest rate increase signal. This also means that the future path of the Fed's interest rate hike basically depends only on the growth rate of inflation.
Under the single inflation target, the annual interest rate will be raised four times. Driven by accommodation inflation, Shenzhen Agricultural Products Group Co.Ltd(000061) inflation and high wage growth, we do not think that the US inflation growth rate can fall back to the target range of the Federal Reserve in 2022. Therefore, raising interest rates four times a year is a high probability event.
What is the most likely factor affecting the path of interest rate increase in the future? Epidemic situation. The impact of the unexpected epidemic on the US economy is a risk factor of concern to the Federal Reserve. When the future inflation growth rate drops rapidly due to the base, the epidemic may turn the fed from the current "extreme hawks" to provide it with "policy space".
Recently, the US bond interest rate may be stable, and the US bond may usher in an upward trend in the third quarter. The driving force lies in the implementation of the contraction table. At present, the market has fully priced four interest rate increases in the whole year. The recent rise in interest rates due to the tightening of monetary policy has been fully priced. After the March meeting, the policy uncertainty has been reduced, and the US bond interest rate may fall instead.
We believe that the annual 10-year US bond interest rate is between 1.95-2.15%. At present, the expectation of raising interest rates is relatively sufficient, and it is difficult for the US bond rate to rise again in the short term. Assuming that the supply of US bonds will increase after the implementation of the table reduction in the third quarter, there will be a new round of rise in US bond interest rates at that time.
Risk tip: the Fed's interest rate hike is faster than expected; Geopolitical risks; The risk of runaway inflation; Inadequate understanding of the Fed's monetary policy.
